Finally, a clear head talks pipeline

STEPHEN HUME
The Vancouver Sun
February 4, 2012

Former ICBC boss looks at Northern Gateway pitfalls - from an economic standpoint.

Recently I advocated a mature and objective discussion of the costs and benefits of the proposed Northern Gateway pipeline that would carry 190 million barrels a year of unrefined bitumen from Alberta's oilsands across British Columbia for shipment by tanker to refineries in China.

A storm of flak, spin, hype and fearmongering has diverted attention from the important issues. They include whether or not the proposed pipeline represents the export of jobs and foregone opportunity for adding value to a resource commodity, long claimed as policy by federal and provincial governments.

So here's a fine example of the calm assessment of risks, costs and benefits essential to any intelligent decision about what's in our best interests.

Economist Robyn Allan, formerly president and CEO at the Insurance Company of B.C., has analyzed the economic effects of the $5.5-billion project, sifting through various claims by its proponents.

Allan says that using the pipeline proponents' own data and projections, the policy of exporting vast quantities of unrefined bitumen to Asia for processing will trigger an inflationary domestic price shock in the cost of petroleum energy and products.

Consumers, small businesses, the transportation and service sectors will suffer the worst.

Economic viability of the pipeline, she says, relies on Enbridge's projection of a $2 to $3 increase in the price of oil, "on every barrel of oil produced," every year for the next 30 years. From current prices, which are admittedly volatile, that would mean oil at $160 barrel with gasoline at $2.40 a litre.

"The inflation this will create as consumers and non-oil producing businesses try to adjust will have far-ranging implications including a decline in output, layoffs, decline in income and government revenues," Allan says. "It will also lead to higher interest rates and create another round of negative impacts as the cost of debt goes up."

The internal cost to Canada that would parallel benefits flowing to the pipeline's stakeholders, among them China's huge state-controlled energy company Sinopec, Allan says, is "an oil price shock to the economy."

Enbridge forecast the annual increase in oil price in its application to the panel conducting hearings for the National Energy Board and the Canadian Environmental Assessment Agency. The company says it estimates a net benefit of $270 billion to the Canadian economy.

Allan's assessment should properly return discussion to the pipeline's role as a foreign-controlled instrument for exporting jobs to other jurisdictions where labour codes are poor and environmental standards are low.

China, whom the pipeline serves, already uses price controls to shield consumers from higher prices, Allan says, while using a vast pool of people willing to work for little pay to keep production costs for its exports - which compete directly with North American manufacturers - artificially low.

In fact, Allan says, the Canadian economy already shows signs of the "Dutch Disease," in which the exploitation of natural resources without adding value causes decline in labour-intensive manufacturing output; in other words, a hollowing out of Canadians' historic source of sustainable, well-paying jobs.

"In Canada, this means the booming oil sector's impact on the Canadian dollar has caused manufacturing, tour-ism, agriculture and natural resource industries who sell their products in Canadian dollars, such as forestry, to suffer significant challenges with respect to retaining profitability and employment," Allan's study says.

"Foreign national oil companies recognize the opportunity inherent in value-added refining of crude oil and distribution of petroleum products," Allan says. "This is at the root of their development strategies and they plan to take full advantage of improving them by directly investing in Northern Gateway.

"Northern Gateway is a means to an end for foreign nationals - ensuring access to Canadian crude oil in order to feed their offshore refineries and distribution networks in years to come," Allan argues.

"Canada's federal and provincial leaders have abdicated their responsibility for meaningful energy policy by endorsing Northern Gateway, and have willingly stepped aside while the value-added potential of our raw resources is sold short on the international market. From a public policy standpoint, Canada is being outplayed."

This kind of analysis is precisely what we need, not diversionary rubbish demonizing proponents and critics.